Apple Enters Phase 2 of its AI Long Game

John Ternus is officially CEO of Apple, and he’s going to fold right out of the gate.

AIn his first big event as the top boss, next week’s “Surprise and Shine” media event at the company’s Cupertino headquarters, Ternus is all but confirmed to be unveiling the endlessly rumored foldable iPhone and he’s just launched the new AI-powered Siri previously showcased at this summer’s WWDC conference. It’s an attempt to make the 20-year-old iPhone feel young again, just as artificial intelligence ushers in a new era for consumer tech. The good news for Apple? After two decades, it has a massive reach to 2.5 billion devices, giving it an edge in the AI age unlike any other.

Rent the AI Runway

Apple’s AI strategy has been simple and well-regarded by Wall Street. Phase 1 involved sitting back and letting everyone else spend big on the AI models of tomorrow. For one salient data point showing why Apple has become Wall Street’s favorite anti-AI defensive play: As Alphabet has embarked on a capex spending spree worth roughly 40% of its revenue, Apple’s capex plans run a little closer to just 2% of revenue. For another data point: Apple, the stock market’s buyback king, authorized another $100 billion in buybacks this Spring, while Alphabet cut its 33-quarter buyback streak earlier this year.

With the imminent launch of Siri AI, Apple is now definitively entering Phase 2 of its AI long game. And it’s the same play the company has always run: leverage a massive consumer reach to become Silicon Valley’s top rent collector. If it ain’t broke, don’t fix it. The division crossed the $100 billion revenue mark for the first time ever in its last fiscal year. The unit recorded $30 billion in revenue in its most recent quarter, on typically juicy margins of around 75%. 

By serving as the meeting point between end-users and top AI models, Apple is set to grow its Services unit even further. In fact, it already has:

• Apple scored $900 million last year taking a cut from in-app subscription purchases made within third-party AI apps, such as ChatGPT or Claude, and is on track to surpass $1 billion in third-party AI fee revenue this year, according to a Wall Street Journal analysis of AppMagic data.
• Meanwhile, then-CEO Tim Cook suggested in July that users could eventually pay for more powerful Siri AI models by way of upgraded iCloud+ subscriptions. In July, Apple said it reached 1.5 billion paid subscriptions across its platforms, including both first-party (like iCloud) and third-party (like Netflix) services.

Monthly Bill+: Speaking of Apple services, the company on Friday announced an immediate price hike on Apple TV+, from $12.99 per month to $14.99 per month, and bundled service Apple One, $19.95 per month to $21.95 per month. Prepare yourself for the “lock-in, jack prices” Phase 3 of Apple’s AI long game.